It is important to know that there are no limitations on what type of property qualifies for Cost Segregation. When conducting a study, one of the first things done is identifying the building use. Whether you own a residential home, a dentist office, or a gas station, we will be able to generate a Benefit Estimate specific to your property. In this blog, we will look at some of the most common types of properties that qualify for Cost Segregation.
1. Commercial Properties
- Restaurant (casual/fast food)
- Bank
- Hospital
- Mixed-Use
- Office Building
- Hotel
- Medical Office
Why Commercial Properties Qualify:
Commercial properties typically consist of a variety of components that can be segregated into lower class lives. These properties often have a range of elements that are eligible for accelerated depreciation, such as specialized lighting, flooring, and tenant improvements (partitions, counters, and fixtures in a retail space). Land improvements are typically extensive and generate a large amount of tax savings. For example if there is a large parking lot attached to the commercial property, the square footage of asphalt will be classified under 15-year property.
2. Residential Rental Properties
- Single-Family Home
- Multi-Family Home (duplexes, triplexes, apartment buildings)
- Condo
- Townhouse
- Cabin
Why Residential Properties Qualify:
Residential properties can be depreciated over 27.5 years as a traditional lease or 39 years as a short-term rental such as an Airbnb. They often contain a large portion of items that can be classified as 5-year property. For example, carpeting, baseboards, vinyl flooring, window shades, and appliances such as your dishwasher, refrigerator, and stovetop.
3. Industrial Properties
- Warehouse
- Laboratory
- Self Storage
- Heavy/Light Manufacturing
- Research and Development Facilities
Why Industrial Properties Qualify:
Industrial properties, like commercial properties, typically include a large number of specialized components and systems. For instance, machinery, heavy-duty equipment, specialized lighting, and extensive HVAC systems in warehouses or manufacturing plants can all be accelerated over shorter periods.
4. Retail Properties
- Shopping Mall or Center
- Gas Station
- Department Store
- Car Dealership
- Hospitals and Healthcare Facilities
Why Special Purpose Properties Qualify:
Special purpose properties are often designed with unique features that can be separately depreciated, such as specialized equipment, custom-built signage, or unique landscaping. Self-storage units, for instance, have specific improvements like security systems, fencing, and interior fixtures that can be depreciated over shorter periods. These properties tend to have distinct design elements that make them prime candidates for cost segregation.
5. Renovated or Newly Acquired Properties
Types of Renovated Properties That Qualify:
- Buildings undergoing significant renovations or upgrades
- Recently acquired commercial or residential properties
Why Renovated Properties Qualify:
Even if a property is not brand-new, renovations or major upgrades often create opportunities for cost segregation. For example, if a building was purchased and renovated, the improvements will be included in the study separate from the building's basis. In many cases, cost segregation can be retroactively applied to properties, allowing owners to capture missed depreciation from the time of purchase or renovation.
Conclusion
When determining whether to conduct a Cost Segregation Study, remember that all buildings qualify. The building-use, when it was placed in service, and how much depreciation has been accumulated will help identify if the tax savings will be beneficial to your situation. If you need more clarification, consult our experts to create a free Benefit Estimate to understand the potential tax savings. The main advantage for property owners is the ability to accelerate depreciation, which can lead to significant tax savings, improved cash flow, and the ability to reinvest in future growth. Maximizing your tax savings through cost segregation can provide both immediate and long-term financial benefits, allowing you to make the most of your property investment.
Join us!
There is still time to sign up for our free Cost Segregation 101 webinar on December 10th: Increase your Cash Flow
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Edited by Randy Eickhoff, CPA, Founder & Head Coach at Acena Consulting. Photo courtesy of Eli Pousson on Flickr.